Bond ETF premiums and discounts

By John Spence

Premiums and discounts to net asset value (NAV) in bond ETFs have popped up during the credit crunch. The story is drawing attention because ETFs have an arbitrage mechanism that is designed to keep the share price aligned with the NAV of the portfolio.

However, this mechanism has broken down somewhat as a result of the volatility and liquidity issues in the bond market during the credit storm.

The FT Alphaville blog took an in-depth look at bond ETF premiums and discounts this week, and it’s worth a read.